Schröder Prevails in EU Takeover Dispute

The European Union Commission has decided to postpone its planned reform of EU takeover law; and in so doing, it has removed a potentially difficult subject from the agenda for this year's German elections.

As recently as last Friday, Frits Bolkestein, the commissioner for the internal market and taxation, was reported to be determined to present his draft directive on July 2. But his spokesman said on Wednesday: "The commissioner has changed his opinion. The directive will be presented at a later date."

According to commission insiders, Bolkestein's decision was made at the behest of EU Commission President Romano Prodi and not of his own volition. He had already been subjected to much criticism, on the grounds that in trying to rush through his draft directive, he had bypassed fellow commissioners Günter Verheugen and Michaele Schreyer (both of whom are German).

Brussels insiders also report that Bolkestein's relations with Chancellor Gerhard Schröder of Germany were growing increasingly frosty. Monti intervened to prevent relations from deteriorating further.

Criticism of Bolkestein's directive was aimed at both its timing and its content, Brussels insiders said. So now, they added, the commissioner will go back and rework it with his term of legal experts headed by Dutch attorney Jaap Winter, an expert in trade law. And this time, he will also consult the European Parliament, these people said.

The Winter group had in January recommended to Bolkestein that he should dismantle all barriers to corporate takeovers within the EU. He seems to have followed that advice only partly.

His draft directive, if implemented, would certainly have dismantled virtually all takeover barriers in Germany. It would, for example, have abolished registered shares, which may be sold on only with the authority of the company concerned. Companies in Germany - notably insurers Allianz and Munich Re, Lufthansa, drug company Stada and Dortmund-based energy group VEW - have used registered shares as a way of protecting themselves from the possibility of a hostile takeover bid.

The Bolkstein directive would also have removed the protection from a hostile takeover that is afforded car maker Volkswagen AG under the so-called VW Law. VW's local state, Lower Saxony, owns just under 20% of the company's shares, and the special regulation prevents any other shareholder from controlling more than 20% of the company's voting rights. But Bolkestein wanted to see all limitations on voting rights abolished.

Furthermore, under Bolkestein's proposals, shareholders alone were to have the right to decide whether a takeover bid is to be treated as friendly or hostile. All defense mechanisms - poison pills, voting-right limitations, multiple voting rights, and the so-called "Golden Share" - would have been rendered automatically invalid as soon as a bid hits the table.

This would have effectively annulled Germany's takeover code, passed only recently, which allows management boards to adopt poison-pill defense measures to fend off hostile takeovers - even if they have not received authorization from shareholders.

But whereas Germany would have been forced to dismantle all its takeover barriers, Bolkestein's directive would have done nothing about barriers in other countries. The most notable mechanism that would have gone untouched was the system of multiple voting rights, widely used in France and Sweden.

This system allows dynasties such as the Wallenbergs and Peugeots to carry on controlling companies in whose capital they hold only minority stakes. Klaus-Heiner Lehner, a member of the European Parliament, criticized these gaps in Bolkestein's directive. "This would not have created the level playing field that's needed," he said.